(Reuters) - A federal judge on Thursday blocked California from enforcing a groundbreaking law that bars "pay-for-delay" settlements between brand-name and generic pharmaceutical manufacturers, saying it unconstitutionally regulates out-of-state commerce. U.S. District Judge Troy Nunley in Sacramento at the request of a generic drug industry trade group preliminarily enjoined the first-of-its-kind law aimed at combating patent settlements that the state said could reduce competition. "We"re very pleased with the result," said Jay Lefkowitz, a Kirkland & Ellis lawyer who represents the Association for Accessible Medicines. "We think the court acted properly invoking the dormant Commerce Clause and striking down this overreaching statute." California Attorney General Rob Bonta’s office called the ruling disappointing but said it was confident the state would ultimately prevail. Pay-for-delay settlements, or reverse settlements, occur when brand-name drugmakers settle patent infringement claims against generic companies by paying them to delay releasing cheaper, generic versions. The U.S. Supreme Court in a 2013 case, Federal Trade Commission v. Actavis Inc, said reverse payments by brand-name drug makers can violate antitrust laws. But the court did not rule that they always are anticompetitive. The California law went further. AB 824, a bill signed into law in 2019 by Governor Gavin Newsom, a Democrat, prohibits pay-for-delay agreements between brand name and generic drug manufacturers by making them presumptively anticompetitive. Violators faced fines of $20 million or three times the value a company received from a settlement, whichever is greater. Then-Attorney General Xavier Becerra, now President Joe Biden"s Health and Human Services secretary, championed the law. AAM sued in 2019, arguing the law violated the U.S. Constitution"s dormant Commerce Clause by allowing California to regulate patent settlements that are negotiated and signed outside of the state"s borders. Nunley and later the 9th U.S. Circuit Court of Appeals found AAM lacked standing due to a lack of evidence its member companies faced harm but allowed it to sue again in 2020. In Thursday"s ruling, Nunley said AAM this time established standing, citing a member company that pulled out of a tentative settlement due to the law. Nunley rejected the state"s claims the law only covered conduct in California, saying it exposed companies to penalties if they, for example, settled a lawsuit in Delaware. "As it is written, AB 824 may reach the kind of settlement agreements proposed by Plaintiff — an agreement in which none of the parties, the agreement, or the pharmaceutical sales have any connection with California," Nunley wrote. The case is Association for Accessible Medicines v. Becerra, U.S. District Court for the Eastern District of California, No. 2:20-cv-01708. For AAM: Jay Lefkowitz and Matthew Rowen of Kirkland & Ellis For California: Jacqueline Palma Malafa of the California Department of Justice (Editor"s Note: This story was updated with a comment from the California Attorney General"s office.)